All men’s miseries derive from not being able to sit in a quiet room alone. – Blaise Pascal

Posted by: donmihaihai | October 27, 2007

Norwegian dentist

I went blank for a moment when Mr Chan Fook Kong, executive director and CFO of Jaya throw out “Norwegian dentists” when chatting on sale and lease back during AGM. I bet that I won’t be the 1st one, maybe one of the last one around to ask about sale and lease back of vessels. There was another investor before me, well prepared, with a full page of questions, asking and writing down points which he thinks is important. Another question that he asked was about whether Jaya is going into the area of deep water offshore support. Why not, these are one of the main reasons that the profits and share price of some of the listed competitors of Jaya are surging. If Jaya is to join this ship of sale and lease back and deepwater offshore support, one can simply guess how big the surge is going to be.

“Not in the same way but Jaya is moving into deeper water too,” I think that was Mr Chan answered to him or something like that. Fair enough, indeed, Jaya is moving into deeper water by building increasing vessels with greater horsepower. Whether it is the place to be in is another question despite the fact that E&P activities are moving into that direction and a young, successful top guy from another competitor was saying it out loud to everyone of the huge supply and demand miss-match. Something I get away from this AGM is that some information is better to be keep away, the lesser it is known, the better it is.

I never asked Mr Chan why he was referring those guys who buy and arrange the sale and lease back of vessels as “Norwegian dentists” despite the facts that knowing Norway has a deep history in shipping so it won’t be a surprise that they are in the frontline of this growing industry of sales and lease back. From Mr Chan, these guys bought over your vessel and lease it back with a fixed contract of say 10 yrs with a certain rate. In the process, they are earnings a return of 15/16% per annual. Now, if the vessel’s owner let say Jaya never sell it in the 1st place, that 15% will belong to Jaya rather than “Norwegian dentist”. The gain from selling vessel over book value can be realise anytime, by selling to any ship owner that does not demand that 15%. He never said Jaya won’t do it, but with the strong and understated B/S, there is clearly no reason for Jaya to do it. At the current super upcycle, it is a very good deal to do it but when the cycle turn, charter rate dropped, “Norwegian dentist” still demand the same amount of rate to be pay yearly, and they don’t care whether it is thru income or borrowing.

Having a very strong B/S is a fact, it is there for everyone to see but the attitude of management toward strategy like Sales and lease back is clearly showing with the term “Norwegian dentist”. Borrow from Warren Buffett, it’s only when the tides goes out that you learn who’s been swimming naked.” Jaya is in a cyclical industry, this upcycle is very profitable but if I can’t cash out before the down cycle come, at least I can take the comfort that management is at least prudent, not swimming naked. Let not forget that during the last down cycle, 90% of the rig builder disappeared from the industry. I won’t be surprise that the figure for offshore vessels was close to 90% as well, even a 50% means many of the current player, especially new players will disappear as well. Like Independent Director Mr Jiew Keng said, “Currently the industry is very good, few years back, Jaya was earning $5 million $10 million per year which was mostly from the sale of vessels.

The Board of Directors of Jaya is being controlled by Affinity Equity, why not, it’s owned about 55% of the total outstanding shares. Having 4 directors from out of total 9 directors from Affinity Equity and at least 2 directors from Affinity Equity showing disconcern, not interested for the whole AGM. That was the same attitude for one of the same director sitting on the board of ex-listed First Engineering. Why sit on the board if you can’t show at least some kind of interests on the whole matter. If you are unable to do it with a heart, make the appearing look good enough for minority shareholders to be convince.

I voiced the concerned despite knowing the facts that it is not going to change anything but it is better to make known that another 40% or so of Jaya is in the hand of minority shareholders. Something that I never say is that by borrowing from text book term “agency problem”. With 4 directors from Affinity Equity, I see not one but two agency problem out there. 1st one is easy, between the board of director and shareholders of Jaya. 2nd is despite Affinity Equity owning about 55% of Jaya, it may not be that these top guys from Affinity Singapore and Hong Kong branch money in it. They are managing this money for some high networth clients. They may have invested in it themselves but it is not known. It becomes a double agency problem.

Despite that I voiced by concern and going there as a proxy, I am just another normal minority shareholder. Don’t be alarm Ms Christina Teo.

The long term attitude on increasing shareholder value may be different between private equity fund and minority shareholder. Who is the future owner of Jaya?